A Signaling Theory of Acquisition Premiums: Evidence from IPO Targets

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Abstract
Pay dispersion in interdependent work settings is virtually universally argued to be detrimental to performance. We contend, however, that these arguments often confound inequality with inequity, thereby overestimating inequity concerns. Consequently, we adopt a sorting (attraction and retention) perspective to differentiate between pay dispersion that is used to secure valued employee inputs and pay dispersion that is not so used. We find that the former is positively related to interdependent team performance, the latter has no effect or is detrimental, and the approach itself helps to reconcile the pay dispersion literature's disparate results. Curvilinearity tests reveal potential constraints on the sorting argument.

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